Investors Should not Count on the Inclusion too Strongly

May 31, 2016

A shares soar on MSCI speculation

China's A-share market jumped by over 3 percent on Tuesday, the
biggest daily gain in nearly three months, which experts said was fueled
by speculation that MSCI will soon include A shares in its indexes for
the first time.

The total trading volume on the Shanghai and Shenzhen exchanges
doubled to 631.5 billion yuan ($95.92billion) from the previous trading
day.

New rules released

Tuesday's surge was largely thanks to continued foreign fund inflows
into China's A shares, according to Qiu Yanying, partner and chief
strategist at VStone Asset Management Co.

"Investors are betting that China's A shares will soon be included in
the MSCI Emerging Market Index," he told the Global Times on Tuesday.

Qiu's view was widely shared in the market. Global investment bank
Goldman Sachs on Tuesday raised the probability of China's mainland
market being included by MSCI to 70 percent, up from 50 percent in
April, citing new rules launched by China's market regulator recently,
Bloomberg reported on Tuesday.

On Friday, the Shanghai and Shenzhen stock exchanges announced new
rules requiring that listed companies that are planning major asset
restructuring should not stop trading for more than three months, and
those that are undertaking private placements cannot stop trading for
more than one month, according to notices posted on the websites of the
two bourses late on Friday.

"The new rules have been widely interpreted as being part
of the Chinese government's efforts to eliminate obstacles that prevent A
shares being included by MSCI," Yan Hong, professor of finance with the
Shanghai Advanced Institute of Finance (SAIF) at Shanghai Jiao Tong
University, told the Global Times on Tuesday.

Yan noted that it could also relieve international
investors' anxiety about the risks from imperfect rules in the A-share
market.

"International investors have long criticized the
mechanism for trading suspension in the A-share market, especially last
summer when more than 1,000 mainland-listed companies simply halted
trading during the market volatility without giving reasonable
explanations," he said

Yan also noted that the new rules would inhibit listed
companies from using asset reorganization to manipulate stock prices,
and this will "protect investors."

Qiu agreed with Yan. "The new rules can raise the possibility of
mainland stocks being included by MSCI," he said, adding that
international investors pay close attention to liquidity, which can be
greatly influenced by non-standard trading suspensions.

The market has widely viewed being included by MSCI as a big potential positive for China's A shares.

"It can help bring advanced investment philosophies and more funds
into the A-share market, which can aid liquidity and reasonable stock
pricing," he noted.

The inclusion could bring in $16.5 billion in incremental funds from
international investors, Li Lifeng, a stock market analyst at Sinolink
Securities, was quoted as saying by Guangzhou Daily on Tuesday.

But Yan from SAIF also cautioned that investors should not count on the inclusion too strongly.

"The inclusion can help enhance reasonable stock pricing, but can't ensure a high stock price," he said.

Besides the increased optimism about MSCI inclusion, the
Shenzhen-Hong Kong Stock Connect plan is also viewed as another
influential factor in reviving the mainland market on Tuesday.

"China is likely to launch the Shenzhen-Hong Kong Stock Connect
scheme before MSCI makes a decision whether to include A shares or not,"
ifeng.com reported on Tuesday, citing a report by Societe Generale.

There has been a net inflow of funds from abroad into mainland stocks
for 11 consecutive days, with a total net inflow of more than 9 billion
yuan, news portal cs.com.cn reported on Monday.

The foreign funds are also an important factor in boosting A shares,
said Qiu from VStone, adding that by year's end, the major indexes are
likely to be higher than they are now. "There are fundamentals to
support blue-chips, which are the pillar for the A-share market."